There is an African proverb that goes like this:
“When two elephants fight, it is the grass that gets trampled."
So I come in peace and apologize for losing it on this thread (albeit that I do believe that my reaction at the time was warranted). I think it would be shame to let personal differences between two good traders result in not being able to share ideas that may be of assistance to both them and others that may be struggling.
To this end then I’d like to share something that I’ve now spent some time finessing and I believe that has relevance to the methodology being used on this thread. I do not, however, profess to understand exactly what is being done here unfortunately. But then identifying support and resistance has not exactly been my forte.
I’ve been working on and finessing something called Risk Based Position Sizing. And it seems to me that it would have relevance here.
From the little bit that I do understand about what’s being done here: essentially trades are being entered based on certain entry criteria (which as I say I don’t really understand) but unlike most trading systems, where it would be required that you place stops at very obvious places and which inevitably will result in your being stopped out or stop hunted more often than not, the trades are given ample room to run until they turn to profit. And it would seem that profits are taken on a discretionary basis which is absolutely fine i.e. there is no need to squeeze every last bit of profit out of a trade and at the end of the day it’s the money that’s banked that counts however much that may be.
The obvious problem to me though is the question of position sizing. And this has been an issue with my core trading system as well. So to this end I present Risk Based Position Sizing. The calculation I have standardized on is as follows:
Lot Size = ( 5% of Total Equity ) / 5 * ( 10-Day Average True Range ).
This calculation will indicate to you the maximum size position that you could be taking with a system such as this. It is dynamic as the 10-Day ATR will obviously fluctuate and therefore lot size should be calculated immediately prior to entering the trade. In addition: it is totally independent of the instrument or FOREX pair being traded. In other words: it will normalize the position size for any instrument or FOREX pair being traded whether it be a major FOREX pair or an exotic. Essentially: it normalizes volatility across instruments or pairs thus eliminating wild swings on some instruments or pairs that may not occur on others.
You may place hard stops if that suits. I do not i.e. my soft stops are mental stops.
From what I gather the question of position sizes and stops has been discussed here before but I saw nothing really definitive. But again from what I gather: it is purported (and which I totally agree with) that it’s better to trade with far wider stops and at the expense of position size rather than to trade with tight stops and with larger position sizes only to get stopped out time and time again for no good reason in the case of the latter. Those stop outs add up very quickly (even at 1% per trade). And possibly even more important: they affect trader psychology. It is very difficult for any trader to continue trading once they’ve been stopped out two or three times in a row. Inevitably they will simply give up and move on to try and find the next Holy Grail. But almost always: the very next trade would have gone well in their favor had they not been prematurely stopped out. But by that time they’re now getting stopped out frequently with the next Holy Grail. And so on and so forth.
So an example.
Let’s assume that you are going to enter a new trade based on the methodology defined by @The_Baller (whatever that may be i.e. as noted twice already I’m not entirely sure that I understand the methodology). So let’s just assume for the purposes of this example that the methodology would have you go long AUDUSD at the current closing price of 0.6928. So here’s the low down:
Capital: $55 000 USD
Risk: 5% per trade.
Risk amount: $2 750 USD.
Opening price: 0.6928.
Based on the above:
Lot size: 12.5.
Note: the figures above may differ slightly at your broker and may also be rounded to a small degree so not exact but should differ only by a very few pips and price points.
Take a look now at a Daily chart of AUDUSD and see just how far the stop is away from price. Bear in mind that even if such stop is reached: you’re only losing 5%. If at some point you decided to close the trade out, for whatever reason, possibly based on following the methodology detailed on this thread, then the chances are that such loss will be a mere fraction of your account. And you live to fight another day. On the other hand: if or when the trade moves into profit then take profit on a discretionary basis or as dictated by the methodology detailed here. Note also that is not a particularly small lot size either and is a fair $ per point or pip movement.
I believe this method of position sizing and risk management to actually be independent of the trading system or methodology being implemented to be honest particularly if the use of stops does not form part of the trading system or methodology or if the stops are of a more discretionary nature which appears to be the case here.
There is, however, just one small problem with this. Most will find it impossible to implement any of the above (sorry to disappoint if you’ve read this far). The reason: under capitalization. On a small account it would be impossible to implement the above. And this of course is another entire topic of discussion i.e. should one be trading with limited capital to begin with (the answer is a resounding “no” in my opinion of course).
The above being said one could take a more aggressive approach e.g. risk on 2% per trade and use only a factor of 3 times the ATR value. The calculation would therefore be as follows:
Lot Size = ( 2% of Total Equity ) / 3 * ( 10-Day Average True Range ).
Obviously this would move stops closer and result in your being able to trade with a bigger lot size. This I’m afraid is personal choice. I favor the more conservative approach myself but always bear in mind that I don’t trade FOREX pairs so a more aggressive approach may be acceptable for FOREX traders.
So there it is. Risk Based Position Sizing.
For what it’s worth and as I’ve noted on my thread: it may very well be “the keys to the kingdom” (for just about any trading system or methodology). And certainly possible that’s it’s my best contribution thus far since starting out in 2005.